Timely and Relevant News: A Market and Economic Update
May 5, 2023
The markets were whipsawed this week by The Fed's announcement and by mounting recession fears despite enjoying a spate of relief as First Republic Bank was finally rescued, with nearly all assets taken over by JPMorgan Chase.
Regional Banks
Regional banks came under significant pressure as financial markets focused on concerns that an impending recession will increase the probability of commercial real estate loans being the next major problem. Regional banks are estimated to be responsible for nearly 80% of all commercial mortgage loans.
Labor Market
The widely followed Job Opening and Labor Turnover Survey (JOLTS) report indicated job openings were at their lowest level in almost two years, while layoffs are rising. The quit rate fell in March, but remained above pre-pandemic levels, as the labor market is still too tight for the Fed’s liking.
Here are more highlights from the JOLTS report for March:
- Fewer job prospects likely pushed down quit rates in March, especially in the construction sector. As construction activity wanes, workers will be less likely to quit their employment in hopes of getting higher pay at another job.
- Wage pressures should ease as fewer workers skip from job to job. As wage pressures ease, inflation strains should follow suit. Bottom Line: The job market loosened in March but not by much.
- There is also data suggesting credit card companies are beginning to see higher delinquency rates, although spending on dining, gaming, and lodging continues, as a still resilient labor market provides confidence and income.
The Fed
Chairman Powell often references the ratio of job openings per unemployed worker, which fell to the lowest since October 2021, but the latest measure of labor tightness is nowhere near levels the Chairman would like to see, which resulted in the Fed hiking the Fed Funds Rate another 0.25% .
Long Bear Market Recoveries Like This Are Normal
Bear market recoveries back to prior highs have taken an average of 19 months. The S&P 500’s current bear market has entered its 17th month (see table below). Recessionary bears logically take more time to recover, averaging 27 months. In non-recessionary bears, the average recovery time was just 11 months.
Given the U.S. could potentially head for a recession in late 2023 or early 2024, a return to the 2022 stock market highs would be anticipated in the spring 2024, if this historical timetable holds. That would represent a very solid 16% gain from current levels.
It is also worth noting that a new bull market would technically be triggered if the S&P 500 rose just over 4% from current levels, which would mark a 20% gain off the October 2022 lows. That may happen before the U.S. economy enters recession, though we won’t know if an official recession occurs until long after the fact.
A new bull market could begin this spring or summer, followed by a pull back to price in a mild recession later this year or in early 2024. Remember stocks already suffered a recessionary-like decline last year.
"During times of volatility it's important to remember time horizon and to rely upon the planning that we've done together. As part of our planning with clients, we seek to align risk and time horizon for different portions of a client's portfolio," said Randy Eveland, CFP, RICP, CDFA®, Wealth Advisor. It is a natural response to want to posture defensively during times of increased volatility. It is important to not lose sight of your long-term goals.
If you have specific questions or would like to discuss your own investment strategy or financial planning needs, we welcome you to call us at 302.234.5655 or email us atcontactus@covenantwealthstrategies.com to set up time to discuss further.
Disclosures
*Source: LPL Research, CFRA FactSet 05/03/23
A bear market is when a stock index or security closes 20% or more below a 52-week high. For this analysis, we take liberty with this and included 19%. All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. The modern design of the S&P 500 Index was first launched in 1957. Performance before then incorporated the performance of its predecessor, the S&P 90.
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References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
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This Research material was prepared by LPL Financial, LLC.